Outside editorial: Welfare for Detroit

Should lower-paid workers help subsidize those averaging $56,650 at General Motors?

Posted: Tuesday, October 28, 2008

After years of decline, U.S. auto companies face the double whammy of a credit crisis and a recession. Car and truck sales fell 26.6 percent in September, the first month since 1993 in which fewer than 1 million vehicles moved off the lots. General Motors, threatened with bankruptcy and burning through $1 billion in cash reserves per month, is groping for a merger with Chrysler. Ford's stock is down more than 70 percent in the past year, and investor Kirk Kerkorian is dumping his shares.

The $25 billion federal loan approved by Congress on Sept. 25 may not reach Detroit for six to 18 months because of red tape. So Detroit's allies are pushing for waivers of the usual rules and, perhaps, another $25 billion before the end of the year. And why not? Everyone else seems to be getting a bailout these days. Hundreds of thousands of people depend on Detroit for their jobs, directly or indirectly.

Well, we can think of several objections. First, there is the question of whether the U.S. government should be picking winners and losers in a business such as this. It's one thing to bail out the financial sector, whose product - credit - is essentially fungible and on which all other businesses depend. Automobiles, however, are not interchangeable, and Congress can't substitute its specific technological and aesthetic preferences for those of the market. What if we lend Detroit $25 billion and still nobody buys its cars?

Second, this bailout taxes the less well-off to protect the relatively privileged. The average individual General Motors production worker, whose job would be saved by the bailout, makes $56,650 per year, according to the Center for Automotive Research, and that doesn't count better-paid, white-collar types. Meanwhile, half of all HOUSEHOLDS - which typically include more than one earner - make less than $50,000 per year. Where's the justice in that?

Congress approved $7,500 tax credits for purchasers of GM's much-touted plug-in hybrid Chevy Volt, built to run 40 miles on a single electric charge. That would knock the net cost of the four-seat Volt, due out in late 2010, down to $32,500 - not much less than a basic Cadillac CTS costs now. Even then, it could take a decade of Volt driving to recoup the difference in purchase prices between it and the far cheaper Toyota Prius. Assuming a few well-heeled drivers take that deal, why should poorer people be taxed to enable them?

The downfall of the American auto industry is indeed a tragedy. But the automakers and the United Auto Workers have only themselves to blame for much of it. For years, they pursued protectionism against foreign competitors rather than tackle them head-on. The automakers say that they need $25 billion from Congress to offset the additional costs of tough new fuel-efficiency standards. Perhaps they wouldn't be in that situation if they had accepted such standards a long time ago and retooled to meet them, rather than persisting in the more familiar, and profitable, business of making gas guzzlers.

We would all have been better off if the federal government had enacted a higher gas tax so that the Big Three could have planned production on that basis. A stiffer gas tax, rebatable in some form to consumers, would still be the best way to guarantee a long-term shift to more economical cars. Alas, there's a limit to how much taxpayers can spend ensuring that such cars get built in Detroit.